HEC Research Papers Series,
HEC Paris

Abstract: We build a dynamic model of investment and financing decisions to study the choice between bonds and bank loans in a firm's marginal financing decision and its effects on corporate investment. We show that firms with more growth options, higher bargaining power in default, operating in more competitive product markets, and facing lower credit supply are more likely to issue bonds. We also demonstrate that, by changing the cost of financing, these characteristics affect the timing of investment. We test these predictions using a sample of U.S. firms and present new evidence which supports our theory.

Keywords: debt structure; capital structure; investment; credit supply; competition

JEL-codes: D83; G12; G32; G33

47 pages, December 10, 2013

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